97

Chairman’s
report | The Japanese
auto industry in canada – 1996

1. CHAIRMAN’S REPORT

As Chairman of JAMA Canada, I have the honour and responsibility to report on the key
events and activities over the past year, and to outline some of the changes and
challenges that will occur in the year ahead.

Overview of 1996

In a nutshell, 1996 marked a turnaround in the Canadian motor vehicle market. While
expectations were high in the early stages, it looked as if it might be another year of
sluggish sales due to low consumer confidence, uncertain economic prospects surrounding
government deficits and ongoing cuts to social programs and civil service jobs. But by the
end of the third quarter, sales began to take off. For all JAMA Canada members, this
recovery has been long overdue. Sales have been declining since the peak in 1991 when our
members collectively sold over 323,000 units.

There are probably several reasons for the turnaround. These include new products and
new designs, pent-up demand to replace an aging fleet, and renewed consumer confidence as
a result of the positive outlook for growth in the Canadian economy. While a weaker
Japanese yen may also have had some effect on consumer perception about vehicle cost, I
suspect that few consumers are aware that two out of every three vehicles we sell are now
being made in North America.

The fourth quarter of 1996 and the first quarter this year have demonstrated that the
recovery is sustainable and that 1997 sales will likely exceed the original forecasts. In
1996, total JAMA Canada sales rose 7% to over 218,000 units, and our market share rose to
18.5%. Over 67.5% of total sales, or 147,000 units, were built in North America.

At the same time, this means that fewer vehicles were imported from Japan in 1996.
Compared to the peak in 1987 when over 295,000 units were shipped to Canada from Japan,
last year’s imports dropped 76% to 70,000 units. What’s more, in the past two
years, we have imported more vehicles from the U.S. and Mexico than from Japan.

On the production side, combined unit output from Honda (HCM) and Toyota (TMMC) jumped
dramatically by 23.2% largely due to increased capacity at Honda’s Alliston plant. If
estimated output at CAMI is included, in spite of the gains at Honda and Toyota, combined
unit production by Japanese-affiliated manufacturers fell slightly, as a result of
cutbacks at CAMI. Exports from Canadian plants also showed growth as Honda and Toyota
together shipped 16% more vehicles to the U.S. and other foreign markets. What’s
more, based on combined TMMC and HCM export activity, Canada continues to be a net
exporter of Japanese brand vehicles in 1996. While over 180,000 units were exported, less
than 149,000 units were imported by all companies from Japan, the U.S. and Mexico.

As a group, JAMA Canada members and the Japanese auto industry more generally, have
become an integral part of the Canadian auto industry that make a significant contribution
to Canada in a variety of ways:

he Japanese auto industry in Canada has grown and changed a great deal over the last
decade. In 1986, Honda of Canada Manufacturing started making cars in Alliston, Ontario.
This was followed in 1988 by Toyota Motor Manufacturing Canada in Cambridge, Ontario. Then
in 1989, CAMI Automotive, a joint venture between Suzuki and General Motors, opened their
plant in Ingersoll, Ontario. In addition, there are over 30 auto parts plants in operation
and 8 new investments have been announced over the past year. In 1997, current vehicle
output is forecast to be about 375,000 units. However, due to expansion at both Honda and
Toyota, total capacity will rise to almost 700,000 units over the next few years, more
than triple the level of our members’ sales in 1996.

In addition to producing more than one vehicle in Canada for every one sold in Canada,
for the past three years Canada has been a net exporter of Japanese-badged vehicles, as
exports from Canadian plants have exceeded imports from Japan, the U.S. and Mexico.
What’s more, Japanese automakers have been increasing their purchases from Canadian
suppliers, and with current expansions substantial new business opportunities will likely
double current levels of activity.

At the same time, imports of auto parts from Japan by non-Auto Pact companies dropped
15.4% in 1996 over the previous year, in spite of the fact that tariffs on imported auto
parts were reduced to zero at the beginning of 1996 by the Government of Canada. In a
nutshell, all these changes mean more investment and more jobs for Canada and Canadians.

Automotive Competitiveness Review

Apart from the rebound in sales that begun last year, the other major events involved
the launching of the Federal Government’s review of automotive competitiveness, which
will continue into 1998. The automotive industry is only one of several designated sectors
targeted by the Government for review, and the intention is to make recommendations on a
range of issues that impact Canada’s ability to be globally competitive and to
continue to attract foreign investment in both vehicle and parts manufacturing.

The review is timely, as auto trade policy in Canada is in need of repair. While
considerable attention has been given to the matter of MFN tariffs on finished vehicles,
the focus on tariffs sometimes obscures the underlying problem with current policies.
While lowering tariffs can alleviate the problem, it is equally important to have an auto
trade policy that is fair and non-discriminatory, applied equitably to all foreign owned
automakers in Canada consistent with international trade rules. To be sure, differential
tariffs on finished vehicles are a major symptom of the problem, but the heart of the
issue is fair and equitable trade policy. The two-tiered industry, established under the
Auto Pact in 1965, has been fragmented by changes in the Auto Pact through both the FTA
and NAFTA trade agreements.

In 1989, the Auto Pact abruptly changed and became exclusionary as a direct result of
the FTA negotiations with the U.S. What’s more, over the last fifteen years or so,
internationalization of the auto industry also changed both the competitive environment
and the opportunities for cooperation and strategic alliances among globally-focused
automakers and parts makers.

This differential treatment in Canada fosters confusion and distortions in the market,
and sends negative signals to current or potential investors. Moreover, it raises
questions about consistency of Canada’s trade policies with international trade
rules. Given that the stated goal of the Canadian

Government’s Automotive Competitiveness Review is to create a favourable
environment for investment and jobs in Canada, both a re-balanced trade policy that is
equitable and non-discriminatory, and lower tariffs are important elements in achieving
this goal.

Economic analysis, together with the experience under successive GATT rounds,
demonstrate that lower tariffs lead to expanded international trade and greater economic
benefits for countries adopting open trade policies. Because tariffs add non-manufacturing
costs to traded goods, generally both consumers and producers benefit from lower tariffs.
This is particularly relevant in Canada where vehicle production and consumption are
fundamentally disconnected. As a result of the Auto Pact, most vehicles sold in Canada are
imported, while over 80% of Canadian production is exported. At the current time,
Canada’s MFN passenger vehicle tariff, while fairly modest by international
comparison, is higher at 7.3% than either the U.S. at 2.5% or Japan at 0%.

In simple terms, JAMA Canada is seeking fair and equal treatment for all automakers in
Canada through open, transparent and non-discriminatory trade policies consistent with the
GATT/WTO, as well as the elimination of tariffs on finished vehicles, a measure that will
benefit Canadian consumers.

PAC and JAMA Canada in Transition

Finally, 1996 was the year when the decision to close PAC was reached. The dissolution
of PAC means that JAMA Canada has also been restructured. The communications/liaison
function of PAC was transferred to JAMA Canada after PAC closed at the end of June 1997.

Among the changes that have been introduced in JAMA Canada are:

1. Setting up a Purchasing Liaison Group to oversee the transition. This group will be
comprised of local purchasing representatives of JAMA members, as well as a JAPIA
representative.

2. Appointing a new Director from JAMA Tokyo to JAMA Canada’s Board of Directors.

3. Appointing our Executive Director as Secretary to the Board.

4. PAC’s two local support staff joined JAMA Canada, maintaining the institutional
memory of PAC for the transition.

5. And finally, in August 1997, we opened our new office of JAMA Canada on Bloor Street
in Toronto to launch our restructured organization.

In closing, we hope this report will contribute to a better understanding of the
Japanese auto industry in Canada and the activities of JAMA Canada. We welcome any
comments or inquiries concerning the material herein.

Yoshio Nakatani

CHAIRMAN

Overview of the Canadian Auto Industry

In 1996, the auto industry in Canada continued to perform well in terms of output and
consumption. Light vehicle production reached 2.37 million units which was 2 percent lower
per unit output than the record of 2.42 million units in 1995. However, our vehicle sales
grew 3.6% in 1996 to 1.2 million units.

Production:

Production of passenger cars in Canada fell to 1.28 million units in 1996, from 1.34
million the year before, while light-duty truck output rose 7.5% to 1.12 million from 1.04
million year over year.

Shipments:

Shipments of all automotive products in 1996 reached $76.8 billion, up 1.8% over 1995.
According to Statistics Canada, motor vehicle manufacturers’ shipments totalled $50.5
billion, up 2.0% from $49.5 billion in 1995; auto parts and accessories shipments also
rose 2.0% to $22.8 billion, while truck body and trailer manufacturers’ shipments
fell 4.6% to $1.8 billion compared to the previous year.

Employment:

Annual average employment in the Canadian auto industry dipped slightly in 1996
according to Statistics Canada surveys, from 517,000 in 1995 to 515,900 in 1996. Motor
vehicle assembly grew marginally, while auto parts and accessories manufacturers fell 8.1%
to 92,500. Retail dealers/distributors and aftermarket sectors also showed small gains in
employment to 130,200 and 225,100 respectively.

Sales:

While sales were still sluggish in the first half of 1996, the market recovered in the
last quarter, and continued into 1997. Total light vehicle sales gained 3.8% to 1.18
million units (1.2 million including heavy-duty trucks). The light truck market led the
charge by jumping 11.3% to almost 515,000 units, while passenger car sales slid back 1.3%
to 661,000 units. In 1996, light trucks represented 43.8% of the total light vehicle
market, and passenger cars 56.2%.

Trade:

In 1996, Canada’s global trade surplus in all automotive products was down 14% to
$7.0 billion from $8.2 billion in 1995. The surplus in motor vehicles was $27.5 billion,
while the deficit in auto parts totalled $20.1 billion.

Total automotive exports reached $64.9 billion, up marginally from the previous year.
Motor vehicle exports totalled $47.2 billion, down 1.1%, while exports of auto parts
gained 5.6% to $15.6 billion compared to 1995.

Automotive imports from all countries totalled $57.8 billion, up 28 percent year over
year. Motor vehicle imports were ahead 4.8% to $19.7 billion, while imports of auto parts
increased 2.1% to $35.8 billion over the previous year.

An overwhelming majority of automotive exports, about 97% by value, go to the United
States. Exports to the U.S. rose 2.0% to $62.7 billion. Exports to Japan reached $172
million in 1996, 11% lower than in 1995 due to a 13.3% drop in motor vehicles and a 19.1%
increase in auto parts exports from Canada.

Automotive imports into Canada are also dominated by the U.S. In 1996, U.S. imports
totalled $49 billion, up 2 percent, representing almost 85% of all imports. Total
automotive imports from Japan reached $2.9 billion in 1996, according to Statistics
Canada, up 5.4% after falling 12.8% in 1995. Vehicle imports in 1996 from Japan totalled
$1.2 billion, down 10.9% year over year; while auto parts imports were up 4.8% to $1.4
billion. For the first time, the value of parts imports exceeded the value of motor
vehicle imports from Japan. And according to Industry Canada trade data, auto parts
imports from Japan by non-Auto Pact automakers fell 15.4% in 1996, while parts imports
under the Auto Pact jumped 52% during the same period.

The Japanese Auto Industry in Canada

There are six Japanese automakers and one medium duty Japanese truck maker who are
doing business in Canada importing, distributing and servicing motor vehicles under the
following brand names: Hino Diesel Trucks, Honda, Acura, Mazda, Nissan, Infiniti, Subaru,
Suzuki, Toyota and Lexus. Mitsubishi Motor Sales America established a Canadian office
recently, and in the near future Mitsubishi vehicles will be offered for sale to Canadian
consumers through their Canadian distribution and dealer network. Some Isuzu brand
vehicles are imported and sold through General Motors affiliated dealers, and a few
Mitsubishi made vehicles are being imported and sold with Chrysler name plates.

Production:

In 1996, total production of motor vehicles at Japanese-affiliated plants in Canada
(Honda, Toyota and CAMI) reached 369,000 units, down from 380,000 in 1995. The drop in
output was a result of severe cutbacks in production at CAMI (Ingersoll, Ontario), to
124,000 units from about 184,000. At the same time, output at both Honda and Toyota’s
Canadian operations increased. Honda’s production ballooned to over 144,000 units
from 106,000 the previous year as a result of capacity expansions for both a new Acura 1.6
EL and the Civic models made at the plant in Alliston, Ontario. Production at TMMC (Toyota
in Cambridge, Ontario) improved 8.0% to over 97,000 units from 90,000 the year before.
Toyota makes the 4-door Corolla and assembles 1.8 litre 4 cylinder engines for the
Corolla. CAMI produces a subcompact passenger car for both General Motors and Suzuki under
the names of Geo Metro and Suzuki Swift, as well as a compact sport utility vehicle under
the name of Geo Tracker and Suzuki Sidekick.

Exports:

As the Canadian market alone is too small to sustain rising levels of production in
Canada since the Auto Pact was signed in 1965, integration of the industry on a North
American basis has allowed foreign automakers in Canada to benefit from trade agreements
that permit access to the larger U.S. market. Like the U.S. Big 3, Japanese automakers
export a high level of their Canadian production and likewise, rely on imported models to
serve the needs of the Canadian consumer.

In 1996, three Japanese-affiliated plants in Canada exported 297,000 units mostly to
the United States, a decline of 7.2% over 1995. The ratio of units exported to units
produced was 80.5%, down from 83.1% in 1995. Based on production and exports of Toyota,
Honda and Suzuki made vehicles, Canada was again a net exporter of Japanese brand vehicles
in 1996. While over 180,000 units were exported, less than 150,000 units were imported by
all JAMA Canada members from Japan, the U.S. and Mexico combined.

From Japan – imports of vehicles from Japan continued to fall in 1996, albeit at a
much slower rate than in the previous three years. Overall imports were down 3.5% to
70,569 units. Light trucks continued to drop precipitously, down 81.1% in 1996 to 644
units from 3,410 units the previous year. Passenger cars ended marginally up 0.3% at
69,925 units.

Over the past decade, unit volumes of imported vehicles from Japan have been reduced
75%. Passenger cars have fallen 68.5%, while trucks have plunged a staggering 99%. With
higher levels of sourcing in North America, JAMA Canada members have imported more
vehicles in the past two years from the U.S. and Mexico than from Japan.

Total unit imports from NAFTA countries (U.S. and Mexico) increased 2.1% in 1996 to
78,042 units. Passenger car imports rose 4.3% to 67,345 units, while light trucks fell
10.3% to 10,697 units. With additional capacity in North America coming on stream over the
next few years, the trend to rely on local production in the U.S. and Canada will
continue. At this point, two out of every three vehicles sold in Canada by JAMA Canada
members are built in North America.

Sales:

Sales of Japanese brand vehicles including imported and domestically built models,
reversed the downward trend in 1996 that had begun in 1991. Overall sales of light duty
vehicles rose 7.0% to 218,230 units for JAMA Canada member companies from a low of 204,037
in 1995. Both passenger cars and light trucks made gains of 7.0% and 6.6% respectively. As
a result, Japanese brand market share gained half a point to 18.5%, even as the market as
a whole was ahead 3.8% in 1996. Passenger car share jumped to 28.1% from 25.9%, but light
truck share fell to 6.3% from 6.6%.

While sales of North American built models made significant improvement by rising 23.4%
to 147,489 units, import sales from Japan dropped 16.3% to 70,741 units.

In 1996, 67.6% of all Japanese brand vehicles sold in Canada were built in North
America. By class of vehicle, about 72% of passenger cars and 40% of light duty trucks,
were built in North America.

* estimated

Source: JAMA Canada

Exports

* estimated

Source: JAMA Canada

Imports from Japan

Source: JAMA

Imports from U.S./Mexico (NAFTA)

estimated

Source: JAMA Canada

JAMA Canada Members’ Sales in Canada

Source: AIAMC, JAMA Canada

JAMA Canada Passenger Car Sales by Company

Source: AIAMC

JAMA Canada Truck Sales by Company

Source: AIAMC

Contributions to the Canadian Economy

Japanese automakers have become an integral and significant part of the Canadian auto
industry. Since first setting up business in Canada over thirty years ago, Japanese
automakers’ contribution to the Canadian economy has grown and developed in several
ways:

1. Consumer Benefits

In pursuit of satisfying the ever demanding consumer, Japanese automakers have
stimulated competition and raised the quality of vehicles not only made in Japan, but
increasingly vehicles designed and developed in North America for the Canadian and U.S.
markets. While quality is seen to be a necessary ingredient for any automaker just to be
able to stay in the market, for Japanese automakers, quality is a constantly moving
target. And as about two-thirds of all Japanese brand vehicles currently sold in Canada
are now made in North America, the benefits to local communities and local suppliers in
Canada continues to grow. In addition, according to opinion polls and industry surveys
over the years, Japanese vehicles still represent the leading edge in terms of
reliability, low cost maintenance and high resale value retention.

2. Employment

The Japanese auto industry is multi-faceted and in the aggregate, employs over 40,000
Canadians in manufacturing, importation, distribution, sales and service.

In the manufacturing sector, more than 6,000 Canadians work in three motor vehicle
manufacturing plants, and about 8,000 jobs have been created in Canada through various
parts and materials operations supplying the North American auto industry. Expanding
manufacturing investments at Honda of Canada Manufacturing and Toyota Motor Manufacturing
Canada will add hundreds of additional jobs directly, plus significant indirect employment
as a result of increasing local sourcing of supplies and services. There are in excess of
25,000 Canadians employed in about 1,000 dealerships according to the Canadian Association
of Japanese Automobile Dealers (CAJAD). Finally, there are about 1,600 people employed in
the national distribution and head offices of JAMA Canada members.

Several of our member companies maintain regional offices and warehouses in different
regions of Canada including Western Canada, Ontario, Quebec and the Maritime region. Some
member companies run operations in Canada related to vehicle engineering, design and
testing. These R & D activities focus primarily on vehicle and component cold weather
testing in Northern Ontario and in the Maritimes.

3. Investments in Manufacturing

There are three motor vehicle manufacturing plants and over thirty auto parts and
related materials and machine tool operations currently in Canada. The total current and
planned investment in vehicle manufacturing by Japanese automakers stands at about $3.7
billion. Further details about Japanese vehicle and parts manufacturing in Canada can be
found in this section.

Honda Canada announced in 1995 an investment of $300 million to build a new minivan
plant in Alliston, Ontario, which is currently under construction and is due to open in
the summer of 1998, with a capacity of 120,000 units and an additional 1,200 associates.
In September 1997, Toyota officially opened their new $600 million plant in Cambridge,
Ontario that will increase capacity by 120,000 units with an additional workforce of 1,200
team members. TMMC will continue to make Corollas at the new plant and add another model,
a sport coupe, in 1998. Their engine plant which officially began production in October,
1995 now makes 1.8L four cylinder engines for all Corollas built in Canada.

In 1996, Honda Canada reported that current capacity had been increased to 150,000
units per year due to strong demand for the Civic and Acura EL models built in Canada.

When all of these expansions are complete, Japanese automakers will have a production
capacity of 680,000 units, and a workforce of about 8,000 Canadians at Honda, Toyota and
CAMI.

In 1996, Japanese automakers manufactured about 2.6 million vehicles in North America.
Canadian plants built 369,000 units or 14.2% of total Japanese production in North
America. This was slightly lower than in 1995 due to the reduced output at CAMI.

About 80% of the Canadian-built vehicles were exported in 1996, primarily to the U.S.

Comparing exports and imports, Canada was a net exporter of Japanese vehicles for the
fourth year in a row in 1996. Imports from Japan, the U.S. and Mexico totalled 148,500
units, while almost twice as many were exported, thereby contributing to Canada’s
automotive external trade balance.